Market Timing Models – S&P 500 is Extended, but not Yet Frothy

There is not much change in the broad market picture. The S&P 500 SPDR hit a new high again this week and extended its uptrend. The long-term trend has been up since February and SPY has been on a tear since early October. Barring a 2.22 point decline today (Friday), the S&P 500 SPDR is set to close higher for 11 of the last 12 weeks. It is an extraordinary run (+9.71% since early October), and shows no signs of slowing.

Despite this extraordinary run, the advance in the S&P 500 SPDR (SPY) has yet to hit the parabolic stage, which means it may just extend into January. As usual, I am watching the daily chart for signs of an outsized decline and uptick in volatility to signal some sort of reversal. Until then, the Index and Sector Breadth Models are firmly bullish, the Fed continues to prime the pump and the tape is clearly bullish. Details below….

Holiday Scheduling

Today’s reports are condensed because there has not been much change over the last few trading days and we are smack dab in the middle of the holiday season. Full reports will resume on January 2nd. Happy New Year!

SPY Extends Advance with New High

The chart below shows SPY with a breakout in the 302-303 area and this area turns first support to watch should we get a pullback in 2020. The rising 40-week SMA is also closing in on this area and could reach it by the end of January. Marking support at this stage is premature because there are no signs of a short-term reversal and the current advance has not reached the “blow-off” stage.

The blow-off stage occurs when an extended advance accelerates and we see some of the biggest gains of the move, such as a weekly gain that exceeds 2%. I am also watching the PPO(1,40,0), which shows how far the close is above the 40-week EMA. SPY is currently 8.175% above its 40-week EMA. This indicator became extended with a move above 10% in January 2018 (red zone). Thus, a weekly gain that exceeds 2% and a PPO move above 10% would signal a blow-off top in the making.

The next chart shows the S&P 500 extending its low volatility advance with another new high this week. The 1-day Rate-of-Change has not been below -1% since early October, while ATR(2) has been below 30 since early December and %Above 20-day EMA has been above 50%. The pullback could start when ROC(1) moves below -1% for an outsized decline and ATR(2) moves above 30 to signal an uptick in volatility.

Note that the current situation in the S&P 500 looks similar to December 2017 and the index surged further in January 2018. I studied this period in last week’s commentary and video (here).

I am not going to start marking support levels to watch going forward because there are no signs that a pullback is starting or a reversal is in the making. I could mark broken resistance as the first support level in the 302 area or use the rising 40-week SMA to mark, but these levels are still quite far away so it does not make sense right now.

Going back again, notice how it took the index some 15 weeks to stabilize after the parabolic move. In addition, the rising 40-week SMA held in early 2018 when SPY corrected. Yes, the index pierced this SMA at least seven times and even closed below it twice (on a weekly basis). This SMA and support levels are not exact and should be treated more as zones to watch on pullbacks, should we get one in the coming weeks or months.

Index Breadth Model Remains Bullish

There is no change in the Index Breadth Model with eight of the nine indicators on active bullish signals. The model has been net bullish since early September when the majority of indicators (at least 5 of 9) were on bullish signals.

S&P SmallCap 600 High-Low% ($SMLHLP) continues to lag and has yet to trigger bullish with a move above +10%. Even though we have yet to see a serious expansion of new highs, new highs are outpacing new lows and the High-Low Lines are rising. The chart below shows the S&P 500 High-Low Line rising since mid August, the S&P MidCap 400 High-Low Line rising since early September and the S&P SmallCap 600 High-Low Line rising since mid October. This is bullish until the High-Low Lines turn down.

Click here for an article and video explaining the indicators, signals and methodology used in the Index Breadth Model.

Sector Breadth Model Gets Another New Signal

The Sector Breadth Model added another bullish signal as the Energy %Above 200-day EMA (!GT200XLE) moved above 60%. Two of the three indicators are now bullish and Energy is net bullish for the first time since May 2018. Overall, all 11 sectors are net bullish with 32 of the 33 indicators are on active bullish signals. XLE High-Low% ($XLEHLP) is the only indicator that remains with an active bearish signal.

XLE Hits Resistance Zone

The chart below shows the Energy SPDR (XLE) moving above its falling 200-day SMA for the third time this year (April, September, December). Even though two of the three breadth indicators are net bullish, XLE has yet to fully reverse its downtrend and remains below its mid September high. Also note that RSI(10) is above 70. Thus, XLE is not in a clear uptrend, is short-term overbought and is trading in a resistance zone. A base may indeed be taking shape, but the current setup is not that great. I would be more inclined to watch and wait to see if a better bullish setup materializes in the coming weeks.

Fed Assets Continue to Increase

There is no holiday for the Fed as it continues to add liquidity to the system and expand its balance sheet. Total Assets on the Fed’s balance sheet increased and hit their highest level of the year. The System Open Market Account (SOMA) increased for the tenth week straight and the most recent increase was the largest of the year. The Fed’s balance sheet has been increasing since early September and shows no signs of letting up. Don’t fight the Fed.

Bottom Line: Bull Market Environment

The evidence remains stacked in favor of the bulls as we hit year-end and move into 2020. The tape is clearly bullish with the S&P 500 SPDR, S&P MidCap 400 SPDR and Russell 2000 ETF hitting new highs again this week. Seasonal patterns are bullish until year-end, but become more mixed in January. The S&P 500 closed higher 50% of the time in January over the last 20 years. Seasonal patterns are just the icing on the analytical cake as far as I am concerned. Price action is the most important and remains unequivocally bullish.

Thanks for tuning in and Happy Friday!

-Arthur Hill, CMT
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